C saw a block of out-of-the-money puts purchased

The shares of Citigroup Inc (NYSE:C) have more than doubled over the past year, ushered higher atop their 10-week and 20-week moving averages. More recently, the stock has stalled in the $53-$54 region, and one speculator may be looking to protect against a pullback by purchasing options "insurance."

So far today, the financial concern has seen more than 10,000 contracts change hands at the December 40 put. With C currently trading at $52.98, this option is nearly 13 points out of the money. Digging deeper, most of the puts crossed in one fell swoop, with a block of 8,386 contracts exchanged at the ask price of $0.35, suggesting they were bought. Plus, volume has exceeded open interest at the strike, and data from the International Securities Exchange (ISE) confirms the initiation of new positions.

By purchasing the puts to open, the buyer has one of two motives: to profit from a steep decline, or to lock in an acceptable price ($40) at which to sell his C shares, should the equity take a turn for the worse.

In the case of the former, the buyer will reap a reward if C breaches $39.65 (strike price minus VWAP) by December options expiration. From the security's current perch, it would take a plummet of more than 25% in order to hit breakeven. In the case of the latter, the buyer wants C to extend its quest for new highs, but is purchasing the puts as protection. Essentially, the puts guarantee the least he'll receive for his shares is $40 apiece, should the equity plunge beneath the strike over the intermediate term. Whatever the motive, risk is capped at the initial premium paid for the puts.

Even before today, option traders have shown a strong preference for C puts over calls. In fact, the stock's Schaeffer's put/call open interest ratio (SOIR) stands at a 52-week peak of 1.08, implying that near-term option players haven't been more put-biased during the past year. An unwinding of pessimism in the options arena could translate into a contrarian tailwind for C.

Speaking of Citigroup Inc's (NYSE:C) short-term options, they're trading at a relative bargain right now. The equity's Schaeffer's Volatility Index (SVI) has descended to a 12-month nadir of 20%, implying that near-term option premiums are comparatively inexpensive. Likewise, the security's 30-day at-the-money implied volatility is at an annual low of 21.5%.